EUR/USD rose slightly to about 1.1725 in early Asian trade on Tuesday. Gains may be capped as markets remain cautious amid stalled US-Iran talks.
Iran said it would reopen the Strait of Hormuz if the US lifts its blockade and the war ends, according to Bloomberg. The proposal would delay talks on Iran’s nuclear programme.
Geopolitical Tensions And Safe Haven Demand
US President Donald Trump appeared unlikely to accept the offer, and US Secretary of State Marco Rubio indicated any deal would need to include the nuclear issue. Continued tension and the Strait’s closure may support demand for the US dollar as a safe-haven, which can weigh on EUR/USD.
Markets are focused on central bank decisions this week, with the Federal Reserve due on Wednesday and the European Central Bank on Thursday. Traders are positioning ahead of both announcements.
The Fed is widely expected to keep rates unchanged at 3.50% to 3.75% at its April meeting, the third straight hold. Attention will be on Jerome Powell’s press conference for guidance on the policy outlook.
The ECB is expected to leave its deposit rate at 2.0%, where it has been since June last year. Policymakers may remain cautious due to uncertainty linked to the Middle East conflict.
Market Context In Late April 2025
Looking back to this period in late April 2025, we recall the market was tense, with EUR/USD hovering around 1.1725. The key drivers were the impending central bank meetings and the standoff over the Strait of Hormuz. This uncertainty created significant potential for volatility, which traders needed to prepare for.
The geopolitical risk surrounding Iran did indeed cause a spike in market fear, as we saw the VIX jump over 20% in the weeks that followed. However, the situation eventually de-escalated without a full-blown conflict, causing volatility to collapse by mid-2025. Traders who sold options or volatility futures after the initial panic were well-rewarded as tensions eased.
As anticipated, the Federal Reserve maintained its hawkish “higher-for-longer” stance throughout 2025, supported by core inflation that refused to drop below 3.5% that year. This policy kept the US dollar strong against most currencies, including the Euro. The consistent message from the Fed created a clear trend for traders to follow.
Conversely, the European Central Bank buckled under the pressure of slowing growth exacerbated by the Middle East energy fears. After holding rates through the summer of 2025, they signaled a pivot and began cutting rates in the fourth quarter as Eurozone GDP growth fell to just 0.2%. This policy divergence from the Fed was the single most important driver for the currency markets last year.
This divergence in central bank policy is the primary reason EUR/USD has fallen from the 1.1700s to its current level near 1.0850. For the coming weeks, selling rallies in EUR/USD remains the dominant strategy, perhaps by using call spreads to limit risk while capitalizing on the pair’s inability to sustain gains. The wide interest rate differential, with US rates currently at 3.75% and ECB rates now at 1.50%, continues to favor the dollar.
We must now watch this week’s US inflation data closely, as any surprise could shift the Fed’s calculus. A higher-than-expected inflation print would reinforce the current dollar-positive environment. Traders should consider using simple put options to hedge against any unexpected dovish turn from the Fed, though this remains a low-probability event.
